Conduent Incorporated (CNDT) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Conduent Inc.’s Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instruction] Please note this event is being recorded. I’ll now turn the call over to Alan Katz. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Conduent’s second quarter 2017 earnings call. Joining me on today’s call is Ashok Vemuri, Conduent’s CEO; and Brian Walsh, Conduent’s CFO. Following our prepared remarks, we will take your questions. This call is also being webcast. A copy of the slides used during this call was filed with the SEC this morning and is available for download on the Investor Relations section of the Conduent website. We will also post the transcript later this week. I’d like to note that we’ve added some new disclosures throughout deck, including adjusted EBITDA by segment, details on signings by segment, pipeline information and various SG&A and operational spend metrics. We’ve also added a modeling consideration slide in the appendix for those of you delving financial models on the company. Hopefully, you’ll find this new information helpful. During this call, Conduent executives may make comment that contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 that by their in nature address matters that are in the future and are uncertain. These statements reflect management’s current beliefs, assumptions and expectations as of today, August 9, 2017, and are subject to a number of factors that may cause actual results to differ materially from those statements. Information concerning these factors is included in Conduent’s Annual Report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law. The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with U.S. GAAP. For more information regarding definitions of our non-GAAP measures and how we use them, as well as limitations as to their usefulness for comparative purposes, please see our press release, which was issued this morning and was furnished to the SEC on Form 8-K. With that, I will turn the call over to Ashok for his prepared remarks. Ashok?

Good morning, everyone, and thanks for joining our second quarter earnings call. Together with Brian, I will cover our performance results and progress to transform Conduent into a profitable, predictable, sustainable and market-leading enterprise. This was a solid quarter for us. As you will see, we are getting traction from an aggressive plan creating change across every facet of our company. Some of these changes are having an immediate financial benefit. Others will require more time. But we are encouraged by the progress we are making and as a result are reaffirming our full year guidance. When we separated from Xerox six months ago, Conduent was an assortment of entities with an unfocused portfolio, redundant systems, inconsistent processes and unreliable management information. Evolving to become a singular highly focused company is fundamental to our performance improvement. In Phase 1, we have aggressively attacked internal issues and problem businesses with the fastest return on effort. External market-facing and client-related issues take more time to correct. But as evidenced by a healthy signings progress, we are well on our way to sharpening our in market execution. Before I cover our results, I will briefly outline the elements of our transformation program. It is organized around five areas which collectively cover our company end to end. First, our brand. Over time, Conduent will be a premium brand in the marketplace. Next, we must grow our footprint in major clients, increasing service line penetrations for higher signings in revenue. Our people are our greater source of competitive advantage. We must invest in our workforce and create a one Conduent culture. We must unify the scrolling and costly IT and real estate footprint that be inherited. Consolidation here is one of our highest near-term priorities. Finally, we will manage Conduent with consistent information, actionable business intelligence and contemporary management tools. As I go through our financial results, I will share examples of progress in several of these areas today. On Slide 3, we provide an overview of our performance for the quarter. Revenue declined, as expected, as a result of several factors. We are exiting unprofitable contracts as well as very small or low opportunity relationships. Some of our businesses saw lower volumes and other cases recently won deals are just ramping up. On the other hand, our signings growth and pipeline quality indicate healthy market interest and client demand for our offerings, validating a vertical domain-base go-to-market strategy. I will cover this in some detail on subsequent slides. Our margins improved substantially. We are integrating and streamlining Conduent across all fronts, including real estate consolidation, vendor rationalization, business intelligence, right-sizing the workforce and streamlining corporate functions. Our Other segment made significant progress this quarter, minimizing what has been a longstanding drag on our financials. We had one of our best Q2 free cash flow positions over the past few years due to our focus on working capital management and collections. Overall, we're pleased with our position coming through the first half. Now let me share certain highlights from across the businesses. On Slide 4, I will review our performance by our three key segments. Our commercial segment represents approximately 60% of our revenue. Here we provide a range of business process services, supporting large enterprise organizations. These include customer experience, human resource services, finance and accounting, procurement, print and mail operations, learning services and benefits administration. During the second quarter revenue declined in commercial, as anticipated, as we focus our relationships on the greatest opportunity and continued to strategically exit contracts lacking the proper financial and risk criteria. Margins were flat but continued to be pressured by underperformance in our customer experience business stemming from a small number of large client relationships. Addressing these client relationships is a major focus area for us. Both contract remediation and competing in higher-value segments are key to improving profitability, and we're making meaningful progress on that front. In public sector, we're one of the largest players in public transportation and a major partner to state and local governments across the U.S. In the second quarter, public sector revenue declined as expected. Key factors included prior year contract losses and decisions made around strategic non-renewals in government healthcare and in the state and local business. Margins declined as a result of revenue pressure, platform investments, including new bid investments and dis-synergy costs. My key focus is to build a strong Conduent for the future. In both commercial and public we had a very strong quarter in signings and pipeline. Annual recurring revenue signings grew 12% and 31%, respectively. Later, I will go into more detail on the changes we've made to our go-to-market strategy supporting these positive trends. Our third business is our Other segment comprised of our health enterprise and education businesses. We've put an intense focus here given its disproportional impairment on our financial performance relative to its size. Our progress in this business led to a substantial profit recovery and was a key factor in our overall margin improvement. Our businesses are consistently recognized for industry leadership and this past quarter was no exception. Examples include NelsonHall recognizing Conduent for our leadership in learning services, customer management and client experience. Everest recognized us for leadership in banking, pharma life sciences and automation. Gartner placed us in their Magic Quadrant for Customer Management Contact Center and one of our largest clients recognized us for achieving the highest net promoter score among all of their customer experience partners. Moving to Slide 5. Our strategic transformation activities underpinned our game plan to align Conduent's cost structure with the rest of the industry. We are on track to deliver on our cost savings initiative of $700 million by the end of 2018. We have identified opportunities for improved efficiency throughout the organization and have a large pipeline of savings initiatives on which we are executing. Almost half of these savings stem from our infrastructure, including real estate and IT. Savings in our commercial business is the other major facet of this program maybe we’ll capture benefits for improvement we are making to the customer experience business. Overall, we are pleased with the progress we are making here and expect to see increasing benefit from this work and subsequent quarters. On Slide 6, I will go into more detail on our strategic transformation progress. As I have described previously, Conduent inherited a strolling, fragmented and costly operational structure that restrained our execution and competitiveness. Aligning us cost structure and operational footprint with industry benchmark is foundational to our turnaround plan. We are getting arms around this opportunity, and the results are starting to show. Our SG&A is down 9% in the first half of 2017 and annual SG&A expense for employee is down 2%. We closed over 80 locations around the world, exited almost 100 leases and we’ll exit many more throughout the rest of the year. We’re also streamlining our accounting systems, reducing legal entities, consolidating payroll and billing systems. Conduent is becoming leaner, more focused organization enabling great agility and sharper market execution. Strategic transformation is essential to this first phase of our turnaround plan. Our progress to-date, combined with the pipeline of future projects, are key factor in our confidence to reaffirm our guidance for the full year. Moving to Slide 7, I will the positive progress we are making in our signing and renews. Understanding our signing picture requires evaluating the composition and quality as well as the overall growth trend. On an overall basis, our signings were down versus a year ago. This was expected given the several large renewals signed last year making for a difficult compare. But compared to the first quarter, however, signings were up significantly over 30% with new business TCV up 24% and renewals up 46%. Within the base of business that we are targeting, our renewal rate of 89% reflects ongoing value to our clients within the margin, risk and performance parameters that we are targeting. Collectively, these results portrait a healthy demand picture for our service lines and are encouraging signs for revenue down the road. There are several contextual points to consider when evaluating these results. We achieved these signings while simultaneously conducting and expensive clean-up of our opportunity pipeline, providing more confidence and accuracy in our demand situation. Whereas we are making extensive reductions in SG&A through our strategic transformation, our benchmark indicate we are under-invested in sales and marketing. Over time, we have the opportunity to remix our SG&A to bring more resources for account support, demand creation and reputation of building. Finally, we are building a sales management and culture fix for a competitive business process service company versus a manufacturing organization. This includes verticalized industry orientation and clear account ownership in line with our “inch wide, mile deep” selling approach. Over time, we are confident these new approaches and investments will drive additional benefits to our pipeline and TCV results. Now let’s take a closer look at our go-to-market results on Slide 8. As I have mentioned, we completely reset our go-to-market model in the first half and these efforts are beginning to pay off. On a rolling 12-month basis, total pipeline has grown to over $16 billion with over $9 billion added in the first half of this year. We had notable wins and renewals across the business, including winning one of the largest automated tolling contracts in the country, becoming the HR outsourcing partner for a large multinational financial institution, and landing a health and human services contract for one of the larger states in the U.S. These accomplishments stem from a range of changes we have made to our sales engine, including realigning our sales coverage and account ownership to a vertical industry orientation, deploying a new sales and commission, plan, naming new commercial sector leadership and driving a higher emphasis on offer training and accounts planning. While overall sales headcount on a net basis was flat this quarter, we are remixing our talent to support or higher-value cross-selling approach. As a technology-lead business services firm, innovation is a key differentiator, we had advantage with an impressive patent portfolio and have received 20 patents since our launch as a new company. Our notable addition last second quarter was our patent for new technology an automatically recognizes status from low-resolution cameras. This innovation brings practical benefits across a range of industries and builds on our expertise in computer vision technologies. We are also continually investing and improving our existing technology platforms to close key gaps with competitions and ensure higher levels of client satisfaction. Examples include, our Midas hospital case management platform, in use in almost half of U.S. hospitals, will soon be available via the cloud for greater accessibility and flexibility. Our Vector tolling platform is now supporting all electronic or cashless tolling across many of our clients, featuring our proprietary and industry-leading license played character recognition. BenefitWallet, our market leading health savings account solution released many new brand enhancements, including new chip-enabled debit cards, a new mobile app and a range of security enhancements making it what we believe is the most secure HSA platform in the industry. Now let’s turn to Slide 9 for an update on our progress relative to the portfolio strategy review currently underway. We are evaluating the assets in our company from several dimensions, mainly desirability, feasibility and viability. Many of our businesses need all three of these criteria, others being some but not all. We have more work ahead to fully complete this analysis, but so far there are few conclusions that we are drawing. There are certain businesses in our company we are defining as core. In these cases, we are well positioned, has scalable technology assets and visibility to exceeding or maintaining market leadership. We will be taking decisions around organic and inorganic actions and opportunities surface that are inline in our portfolio strategy. These actions will strengthen our capabilities and core businesses and create a tight focus around segments where we can create competitive advantage. At this point, we are evaluating $250 million to $500 million of revenue for potential strategic actions. We'll be keeping our stakeholders informed of any final decisions and actions made as we complete our portfolio assessment. Before I hand over to Brian, I will recap our results with several observations. During the second quarter, we're gaining traction on our turnaround plan. Some of the actions we're taking yielded identifiable results this quarter. Others will yield benefits in future quarters. But across the board, we're successfully transforming Conduent while simultaneously driving greater input in our offerings across our client base through enhanced cross-selling. Our financial position is improving. Stronger margins and better cash positions are creating the capacity we need to take the next round of actions, including some that are more strategic and longer term. While we have more work to do, we are pleased with our position after our first six months as a company. Every element of our organization is aligned to our transformation plan. The next level of our management team has internalized the changes we must make and are driving them through their respective teams. We are well on our way to driving the much needed transformation of the company. I expect us to build momentum in the coming quarters such that we will meet the expectations of the various stakeholders to whom we're in service, our clients, employees, investors and the communities in which we operate. With that, Brian will take us through the financials in more detail and then we'll come back for a Q&A. Thank you.

Thank you, Ashok. Let's start on Slide 11 with an overview of the Q2 financial results and a walk through the P&L. As Ashok discussed, revenue of nearly $1.5 billion was down 7% on both the reported and constant currency basis compared with Q2 2016. This was in line with our expectations. The year-over-year revenue decline was driven by loss business, lower volumes with some existing clients, pricing and strategic decisions. These factors were partially offset by the ramp of new business. In the quarter, approximately 50% of the year-over-year revenue decline was the result of strategic actions, including the wind down in New York MMIS and prior year government healthcare losses. I'll note that the price pressure eased this quarter as we've maintained price discipline during the last several months. Gross margin was 16.2%, an improvement of 40 basis points versus the prior year period, reflecting transformation-driven savings as well as improvement in the other segment partially offset by dis-synergies, investments and the impact of the revenue decline. SG&A expenses declined by $70 million, also driven by strategic transformation, partially offset by corporate dis-synergies and investments. Dis-synergies were approximately $80 million in the quarter and $35 million in the first half of the year. Our current full year estimate for dis-synergies is approximately $65 million, slightly higher than our previous expectations, driven by higher IT transition costs. As a reminder, these cost includes spend in IT and technology as well as corporate expenses such as setting up new HR, marketing and finance functions and public company costs. We've been investing in our people, platforms and internal systems. We've hired the talent that we need to redo organization from both the functional and operational perspective. We're also investing in HR and finance support systems that will give us the data that we need to manage the business. And we've started making investments in our platforms. We expect these investments to ramp in the second half to improve our revenue trends. At the same time, as Ashok discussed, we're continuing to work aggressively on reducing our G&A and overhead expense by focusing on streamlining our real estate footprint and corporate functions. We took significant actions late in Q2, which we expect will yield results in the second half of the year. Q2 adjusted operating margin of 5.9% improved 110 basis points compared with the prior year, driven by the improvements in gross margin and SG&A. Adjusted EBITDA in the quarter was $157 million, up 6% year-over-year with an adjusted EBITDA margin of 10.5%, and 130 basis point improvement over Q2 2016. While most of the improvement in profitability this quarter was driven by the other segment, we expect to see greater flow-through of our cost actions in Q3 and Q4. Moving below the operating margin line, restructuring cost increased by $30 million in the quarter as we closed facilities and continue the process of rightsizing our workforce. Interest expense of $34 million increased $23 million year-over-year due to increased debt levels. In the quarter, we recognized the gain from the sale of the former ACS headquarters in Dallas, which resulted in $24 million income during Q2. Our pre-tax loss was $11 million, $23 million better year-over-year, driven by the increase in operating income, lower separation costs, gain on sale of assets and other net income, partially offset by higher interest expense and restructuring costs. Our adjusted tax rate in the quarter was 33.3%. I would note that in Q2 2016, we benefited from the release of a tax reserve. GAAP net loss in the quarter was $4 million or $0.03 per share. Adjusted net income was $36 million, a decline of $27 million compared with last year, as operating margin expansion was offset by higher interest expense and a higher tax rate. Adjusted EPS was $0.16. An overview of commercial segment results is provided on Slide 12. Q2 revenue declined 7% compared with the prior year period impacted loss business, lower volumes from existing clients and strategic exits mostly in high-tech, retail, industrial and healthcare payer spaces. Approximately 40% of the year-over-year decline in this segment was strategic. Segment margins were flat compared with Q2 2016, but profit decline by $3 million. Adjusted EBITDA was lower by a million and our adjusted EBITDA margin increased 50 basis points compared with Q2 2016. Our strategic transformation savings were offset by profit pressure and our customer experience offering, the overall revenue decline from existing clients, investments in dis-synergies. Customer experience remains a challenge in this segment, and is not performing as well as we would like. A continued pressure has been driven primarily by a handful of large client relationships, which we are in the process of addressing. While we have made many steps in the right direction in the commercial segment, there is still much work to be done. We will continue to work as quickly as possible to turn this segment around our confident and our average will begin to show results from the back half of the year. Now on to the public sector segment results on Slide 13. The revenue decline we experience to Q2 was as we expected, driven by prior year contract losses and our government healthcare, state and local and payments offerings. Given the longer-cycle nature of this business, some other revenue had wins we are seeing now are attributable to active the decisions taken as far back it’s two years ago. And particularly this quarter, we’re beginning to see the impact of prior year strategic decisions on our government healthcare business, which is resulting in a revenue decline. The legacy government healthcare contracts tend to be a higher a profit margin business, so we’ll continue to see the impact of this revenue decline in our segment profit as our mix changes. Our transportation business remained steady with flat revenues this quarter as new business ramp and totaling was offset by previous declines. Compared with Q2 2016, segment profit and adjusted EBITDA were down 19 million and 21 million respectively driven by loss business and our government healthcare state and local and payment services offerings dis-synergies and investments in our core offeringsc including than investments to go after some knuaintors . We see margins and our public sectork business stabilizing at Q2 levels with the potential for modest improvement by year end. We will continue to use multiple avers to improve profitability, including the level of investments that we make and additional actions we can take around costs. Let’s move to slide 14, which provide an overview of the other segment including our health enterprise and education businesses. Revenue within our other segment was $80 million in the quarter, a decline of 16% versus the prior year period. This was largely driven by the New York MMS contract, which declined by $50 million, and the continued run-off of our education business. The discussions are ongoing with our clients for the New York MMS contract. 3e are workings, conclude these discussions focused as quickly as possible. Our team has been extremely focused on improving profitability in this segment, during the quarter, the other segment rows $3 million a solid improvement year-over-year, although slightly lower than the Q1 loss. Much of these improvement year-over-year was driven by two factors, reduction in the amount of remediation work and our - portfolio and operational improvement in the health enterprise business. The education business made a profit of approximately $1 million and health enterprise loss approximately $4 million in the quarter. Consistent with what we indicated last quarter, while we would expect some variability and profitability quarter-to-quarter, we remain on track to achieve breakeven for this segment in 2018. Moving on to Slide 15, cash flow improves significantly year-over-year as we made a meaningful push in the quarter to drive operational focus and improve collections impairables. Cash flow from operations was $67 million in Q2 2017 versus a use of $61 million in Q2 2016. This improvement was largely driven by working capital. Free cash flow from operations was $69 million, which includes $33 million in proceeds from the sale of our Dallas site. Even excluding this item, free cash flow improved versus the use of $97 million in the prior-year period. We still expect the back half of the year to be stronger than the first half of the year in terms of cash generation, and we remain on track to achieve our unchanged full year target. CapEx in the quarter was $27 millions, down year-over-year, as our balance sheet investments have come down. Given the slower pace of CapEx in the first half, we would expect CapEx to be close to 2% revenue for the year. Cash flow from financing was a use of $90 million, which included the fees associated with the refresh term loan B in April. Turning to Slide 16, I’ll provide an update on our capital structure. We saw about a $50 million pickup in cash in Q2. At quarter, end we had $309 million of cash on the balance sheet and over $663 million available on our revolver. During the quarter we did not make any additional draw downs on our revolver and had $70 million outstanding at the end of the quarter. I’ll note that we are fine tuning our outlook interest expense given trends to date, and now expect interest expense for the full year to be about a $140 million versus a $145 million previously. As a reminder in April, we repriced our term loan B, which resulted in a 150 basis points reduction in the interest spread and elimination of LIBOR floor. Our adjusted leverage ratio for the quarter was 2.8 turns, our target ratio remains less than 2.5 tons, which we expect to achieve over time to worried of payments and improve profitability. Now let’s move to Slide 17. Before I close I want to reiterate our 2017 guidance we offered on our last earnings call. We still expect 2017 revenue to decline between 4.5% and 6.5% for the year. We expect to deliver adjusted EBITDA growth of between 5% and 6%, and we expect that 20% to 30% of adjusted EBITDA will flow free cash flow. Now let’s open up the call for Q&A.

[Operator Instructions] And the first question comes from Shannon Cross of Cross Research.

I'm curious, when we think about what's going on in terms your Other segment and the recurring nature of some of the cost savings that you have there, can you talk about as we think most of what you've done there is recurring in future quarters, or there were some one-timers during the quarter we should take into account?

Shannon, this is Brian. The Other segment is improving in line with what we're driving in both the education space and the health enterprise space. There were no one-time improvements in the quarter. Having said that, there could be some lumpiness. As we run off education business and as we stabilize the health enterprise business, there could be lumpiness but there were no one-time items and we expect to see continued progress in the second half.

And then when you think about the revenue that you're looking out for divestiture, the $250 million to $500 million, can you give us some idea sort of what the parameters were that led you think you move away from those businesses? Are they predominantly loss making, are they no-growth? Just kind of curious as to how as you configure your pruning, what specific things you focused on?

Shannon, this is Ashok. So we basically used the lens of desirability, feasibility and viability and by that I mean: Does the business have a growth potential? Is it addressing any wide spaces or what the size of the market is? Is there a differentiation or disruption that we bring to the table? Do we have the appropriate IP and talent in technology? That's the desirability lens. The feasibility lens is: What are the investments that are required to make it current or to make it competitive? Should we build more of this or should we buy? What the technology, product landscape and operating model are? And from a viability perspective, is that business a profitable, is it a predictable, sustainable business with healthy cash flows? So we've looked at all our businesses, you'll recall that we're made up of multiple companies that have been acquired over a period of time. So we've looked at each of these businesses to determine also apart from these three lens, if there is a common golden thread that runs through them. And if it does not we obviously put that into a bucket where we believe that it should probably not be part of our go-forward business model. The financials of these business ranged some are not profitable, some have a profitability characteristics similar to that of the company overall.

I was just going to ask, can you talk about whether or not you've sort of identified potential acquirer through these businesses or if you still sort of in a I guess determining stage?

So we're in the determining phase, we've taken one action on one of our business, which is the global mobility or relocation business, which was a very negative margin business but as we're identifying the businesses and identifying the nature of the transaction we need to do we're obviously getting a lot more active on that front.

Thank you. And the next question comes from Puneet Jain with JPMorgan.

Let me ask about public sector business which came in a little bit below in margins and revenue growled to what we were expecting; so understand margin impact from weakness in GHS, but can this businesses margins improved in second half and pick up the slack if other segment mean reverses?

Yes. So our view is that the pressure on the public sector margin will remain in Q3 and Q4 and we expected to stabilize at the Q2 levels. I will note that the margin still 15.4%, which is at the company’s long-term overall adjusted EBITDA margin target. However, we do want to make progress in all segments overtime. But given the revenue dynamics and government healthcare, given the investments we’re making which are important for the transportation business as we go after large deals. We want to make sure, we continue to be position well there. We expect the margins to stabilize at the current levels right now.

And revenue growth for first half is running somewhat below the guided range. Going forward, do we expect trends to improve from easier comps? Or strong bookings over the last two quarters could begin to contribute in some way?

So in Q3, we expect to see the decline moderate as we laps some of the strategic decisions we made especially in the commercial business in the prior year. And in Q4, we have an easier comp with the New York MMIS right off. So between those two things we have line of sight to improvements Q3 to Q4.

And the next question comes from Brian Essex from Morgan Stanley.

Brian, Brian I guess either, Brian or Ashok. Brian, I was wondering – well, I guess either or Brain or Ashok I could ask about the renewals. How are pricing and margins for those renewals? What kind of -- maybe if you could give us some color on the businesses there? Were there underperforming businesses in those segments were you anticipate you might get incremental margin improvement going forward because of better use of automation and so forth? Or was this maybe just a little bit detail on the contracts and I have a follow-up.

So I would say pricing has been stable. If I look in the past six months and we’ve seen less of an impact on revenue from pricing than we have in previous years. And some of our renewals are coming actually a higher prices as we go through contract remediation. And then others have the typical price downs we typically deal with renewal time. But I would say pricing is definitely better than in previous years given the remediation effort.

And then maybe if you could highlight progress with the sales force? I know that last time we spoke, the headcount was relatively flat. You had some churn and mix shift more towards were you kind of strategically align the sales force. Maybe an update there in terms of since the beginning of the year, how much churn have you had? And then do you still anticipate growing the sales force to kind of that 360 level at some point in near future?

On the sales force, on a net basis at the end of Q2, we are still relatively unchanged. We’ve added about 18 new salespeople in the last 90 days and lost about the same number actually, actually 20 salespeople which we have churned out. So though the hiring is happening, so it’s about two salespeople join every week, it a little time for them to ramp up. We’re also driving -- we’re trying to get more people from the industry aligned with our industry vertical and domain focused DPO. But that is not a situation, that is necessarily where we want to be. So we still have our target of growing that by 20%. We’re finding device talent, but we also having to aggressively churn out the necessarily align with our go-to-market model.

And the next question comes from Keith Bachman with Bank of Montréal.

Thanks very much. I had two questions, if I could. The first is the EBITDA -- the adjusted EBITDA performance this year so far has been entirely driven by the other segment whereas the commercial segment is still lower dollar profits. I know revenue hurts a little bit and certainly the same for public. You mentioned that cost actions will take hold in this second half of the year. Would you expect a more even contribution as you look at or more evenly distributed contribution of EBITDA growth as you look at the back half of the year or the other segment be continue to be the driver?

I would say the other segment will continue to do better year-over-year in Q3 and Q4. Public sector will stabilize the margin we saw in Q2, and then commercial we expect to make progress on the commercial margin. As we do restructuring, as we address customer experience issues that haven’t yielded yet, we still have a handful of large clients in the customer experience area that are actually dragging profits down year-over-year and quarter-over-quarter more than they did last year. And so as we address those, we expect the benefit from customer experience as well.

Okay, fair enough. Then my follow-up relates to that is, I think in the press release and also in the prepared remarks, you mentioned the call center business was proving to be a bit more challenging than you had anticipated. Is it still your view that this is a business that you can fix so to speak will improve the profit margins? In others words, is it still an assets that investor should be thinking about being part of Conduent on a go-forward basis?

So Keith, the way I’d address that is, we have actually looked at our entire customer experience business both in the commercial sector as well as in the public sector. In the public sector, our customer experience business is commingled or it’s integrated into our overall value preposition and the financial performance and the use of technology is much better, so the productivity numbers are much better. On the commercial side, buy and large the customer experience business is fairly profitable. We have a few select accounts and contracts therein which are old contracts, they have been -- the contracts have been written in such a way that gives us very little leverage and its performance is very poor. We have isolated them. We have identified the action items around that, got our arms around it. Are in front of the client in terms of discussions, have had a few successes, but buy and large we believe the remediation of that will take a longer period of time. So on a net basis, customer experience is going to continue to be an integral part of the value preposition that Conduent brings to the table from an end-to-end perspective, but they are a few select large accounts and businesses there in where the contact structure is extremely complex which we are addressing, in summary we have addressed, but the results of that will take longer to - than some of the other actions that we have taken.

Thank you. And the next question comes from Jim Suva with Citigroup.

Thank you very much especially for the details thus far. When we think about your plans to do the strategic reviews of the business, how much so far have you already completed? Because in Q1 you talked about the New York contract, in Q2 you talked -- can you give us a grasp on how much has been completed thus far?

So, obviously we made the New York decision in Q1 and then in Q2 we talked about small accounts and run-off businesses that would have about a 1 point to 1.5 point impact on revenue this year. We now see the runoff businesses impacting revenue at about 0.1 for this year. And then right now we're looking at the rest of the portfolio, determine what's core and non-core and looking to divest some cases in non-core, and that's where we give the range of $200 million to $500 million of businesses that are under consideration for divestiture. So that's where we are. We'll provide more color on the process as we get ready to do transactions and at that point we'll update any guidance impacts that we'll. But as we come into the next quarter, there should be more clarity around core and non-core and we'll continue to talk about some core businesses such as transportation, HR, outsourcing, our workers comp business, our compliance to financial services businesses. We've talked about those as core, and we continue to believe that they're core.

And then my follow-up question is probably that you talked about house core and the ones that you're working you continue to believe is core. Is it fair to assume that then those you've already embedded and assessed and have put those in the bucket of keeping or you're still more due diligence for the strategic review even with some of those?

I think for the time being we have hand around the number of assets that we believe we need to evaluate to see if they're core or non-core. I think at this point in time we'll take a pause before adding anything new to that bucket.

Thank you. And the next question comes from Frank Atkins with SunTrust.

First I wanted to ask about new business signings, what are some of the areas you're seeing they're? I guess you mentioned some large transit deals out there, but more generally what are you doing to ensure kind of high quality by client and higher levels of profitability going forward in your new work?

So in these sectors, we are actually finding a lot of traction in the banking, insurance and capital markets business. I think that's been an area that's not been very strong for us so we're finding good traction on that, especially in the compliance area, in the workers compensation area. We are good fraction in the business. We're finding good traction in the hi-tech space. We have seen seeing good traction in our transportation business. Obviously, there're a few large deals that are out in the market. We're not an incumbent in any one of them. We believe we're well positioned to be able to compete aggressively on a few of them that we think that could be profitable. Of course, we're continuing to hold ourselves accountable to profitable deals. We're not necessarily interested in long tenure both in the transportation and public sector. That's an exception and we're focused on the industries where we believe we've an advantage. The delivery of these services we're going to use the global delivery model more and more in order to drive higher degrees of productivity and profitability.

Just a quick numbers question. What is average contract length? And do you have a view or a bias as to where that should go?

So it’s 3.5 to 4 with public sector being longer and commercial typically being shorter. And we would expect it to probably be stable in public sector and maybe can down a little bit commercial but overall be stable.

Can you update us where we stand in terms of kind of the percentage of contract remediation efforts? Where you guys are in terms of time horizon?

So we are in terms of remediation, if I look at this - the proxy that we are using is what we call self-inflicted in terms of our renewals. So about overall for the company 50% of the losses with self-inflected about 40% in the commercial space and about 25% in the public sector space. We think we are progressing well on the remediation overall. I think, we need to do a little more words on our customer experience, only because these contracts were written a long time ago and the highly unfavorable and very large from a client perspective. So we have, as I said, we’ve isolated that to the sector and to the contract and to the client and we are in active conversations with them. We cannot afford to necessarily be to aggressive about it, because we have other businesses aligned to that client. But that is an area of intense focus to us and we will continue to work on that.

And the next question comes from Bryan Bergin with Cowen.

Just a follow-up there on the customer experience progress. It just goes how many of the contracts that you actually renegotiated really coming or you need to renegotiate there. I’m just trying to get a sense of what share of the commercial and public segment currently represents and where you expect that to trend over the year.

As we haven’t disclose the exact numbers, but we have on successfully remediated and renegotiated some customer experience contracts. We exited others. And then there is the handful that we discussed that we’re still actively working. So that’s how to think about it. A lot of it’s behind us. But there are a handful of large clients we’re actively working.

Okay. And then on pipeline, any notable differences in the pipeline versus your existing business or versus your latest signings? Just think further color on quality and then composition across segment mix.

Yes. For one, we cleaned up our pipeline right in January, December-January timeframe last year and early this year, we cleaned up the pipeline. Our focus is to reduce the tenor of the deals to the point that Brian maybe a fairly comfortable with 3.5 to 4, but we have a lot of deals in our pipeline, which were 10, 20 years, which is an area of comfort for us. In select public sector deals, we’ll go there. Our pipeline, the pipeline looks fairly decent from where in terms of meeting our expectations for revenue, et cetera, it’s the conversion that we have to focus on. We’re beginning to see -- beginning to get invited to a lot more of what I would say non-traditional BPO. We’re seeing a lot more of the analytics business. One of the reasons, we believe that customer experience will continue to be a four part of our business is because that’s an area where we collect a lot of data, which we can put an envelope of analytics capability. We’re seeing a lot more cloud. For example, our Midas platform is now being, I know the accessibility for that is now required on cloud, so we’re moving that. We just came out with our facial recognition technology. We’ve not seen any traction with necessarily on revenue, but all of conversations around it, we think we’ll be able to monetize that. So the nature of some of these deals are is changing but the bulk of it continues to be a BPO essentially highly scalable repeatable businesses more so than we have seen in the past because that’s a sweet spot for us and that’s our focus area.

Last one for me. Just what were the net transformational savings to-date and the business reinvestment level and any changes in the mix towards your targets?

Yes so the 430 target cumulative target for this year, we are on track 2, the actions we took in Q2 get us to be on track to that target. Business reinvestment is increasing and we are starting to ramp investments and we will be focused on platform investments in the second half around their core areas. So to better position us. So things are progressing in line with our expectations and with our guidance.

Thank you. And that was a last question, I would like to return the call over to Ashok Vemuri, CEO, for any closing remarks.

Thank you. So we attempted to provide additional disclosure as we had promised we continue to look for feedback from you in terms of what you would like to see or hear. But the attempt is sort of move the estimates information between what we are seeing and what we are talking to you about. We believe that maybe I strong believe that we have a management team that is fully internalize the transformation agenda and I think we are beginning to see the impact of their efforts in the results, we have to obviously continue to keep up the efforts that we have made, but I think we are off to a good start. Thank you very much.

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.